We should permanently eliminate the 2% payroll tax surcharge

Sunday

Feb 3, 2013 at 3:15 AM

By Sara Dustin

An Associated Press article discussing the restoration of the 2% payroll tax surcharge as part of the fiscal cliff deal was widely circulated earlier this month under the headline, “Paychecks a little lighter this year.” Try $100 billion lighter. Maybe the amount subtracted from each paycheck is small, but that is the minimum total amount of lost consumer spending the ending of the payroll tax surcharge holiday will cost the struggling U.S. economy every year

Unfortunately, when the current Administration won a small increase in the tax on the wealthy at the expense of a 2% tax increase on the people they employ, it did not just slow down the recovery. It also damaged our social health. It reinstated a stealth shift of the cost of financing the federal government from the very-well-off to the rest of us which has been under way ever since the surcharge was first imposed in 1983, and which has contributed to the growth of economic inequality. To understand how this works, it is necessary to review a little history.

A 4% surcharge, evenly split between worker and employer, was added to the payroll tax when calculations performed in the depths of the 1980-1982 recession predicted the imminent collapse of the Social Security system. When the economy recovered in the mid-1980s, the tax began to generate large sums of money that were no longer needed to finance the benefits due to the older colleagues of the workers from whose paychecks it was extracted.

Instead these funds were loaned to the federal government via investment in U.S. Government Bonds for deposit in the Social Security Trust Fund. The designers intended to build a spendable reserve large enough to see the program through the baby boom retirement bulge without reducing retirement and survivors’ payments.

The restoration of the 2% surcharge does not increase the revenues of the federal government, as the press has erroneously asserted. It increases the amount the U.S. government borrows from American workers, via bond purchases for the Trust Fund. That loan already totals $2.7 trillion dollars, It is 2 1/2 times our debt to China. And though the bookkeeping does not include it, it is equal to 12% of the official national debt. It makes the working people of America one of the federal government’s major creditors.

Because it will accelerate bond purchases, the reinstatement of the 2% payroll surcharge will speed up the growth of our communal debt. But the social consequences of this decision are far more dangerous. For when we, the workers, buy U.S. government bonds for the Trust Fund, the money we loan is spent by the government in the same year it is received to meet the immediate demands of the federal budget. Because it has been able to borrow surcharge money from us every year since the mid 1980s, the government has not needed to raise as much revenue from other sources.

Our purchases of bonds have helped finance cuts in taxes on capital gains, large corporations and stratospheric incomes. The surcharge has transferred more of the burden of supporting the federal government from high income families enjoying reduced tax rates to middle and low income employees paying higher payroll taxes. The surcharge amnesty corrected this regressive shift.

As our economy recovers, the date when the Trust Fund must be tapped will resume its retreat into the future. The current effort to cut benefits and delay eligibility — heavily financed by wealthy individuals whose taxes might be raised to redeem the bonds — seems designed to delay that event indefinitely. By seeking to shrink the system’s annual benefit bill to the currently predicted size of its future revenues, the proponents are, in practice, arranging for the fund to grow endlessly and the Government to welch on its debt.

It’s time to worry less about feeding the fund and more about spending it. For if it is not used, it remains an empty promise and a dishonest imposition on American workers. If, ten years down the road, it becomes clear that the system’s revenues and bond holdings will not be sufficient to see us through the baby boom bulge, we can increase the payroll tax again. Current insolvency predictions give us time. In the meantime, the moratorium on the Social Security Trust Fund payroll tax surcharge should be restored.

Sara Dustin was vice president of The New Hampshire Association of the Elderly in the late 1990s. She currently sits on the Board of the N.H. Chapter of the Association of Retired Americans.